What Investments Are Not Allowed in an IRA: Banned Assets and Penalties

Three investments are flatly banned from an IRA under federal law: collectibles, life insurance contracts, and S-corporation stock. Beyond those hard prohibitions, a broader set of prohibited-transaction rules can disqualify almost any other investment based on how it’s used or who benefits from it. Knowing what investments are not allowed in an IRA matters because the penalties can wipe out the tax advantages of the entire account in a single year.

Collectibles

Buying a collectible with IRA funds is treated as if you took a distribution equal to the purchase price. The statute defines “collectible” broadly to include artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and any other tangible personal property the Treasury designates.¹ A vintage painting counts. So does a case of rare Bordeaux. The IRS doesn’t weigh whether the item is a good investment. If it’s on the list, the money you spent gets added to your gross income for the year, and if you’re under 59½ the 10% early withdrawal penalty applies on top of the regular tax.

The Precious Metals Carve-Out

Certain coins and bullion escape the collectibles ban, but only under strict conditions. Eligible coins include U.S. Mint gold, silver, and platinum Eagles, plus coins issued under the laws of any state.¹ Bullion bars qualify only at these purity levels:

Gold: 99.5% pure (.995 fineness)
Silver: 99.9% pure (.999 fineness)
Platinum: 99.95% pure (.9995 fineness)
Palladium: 99.95% pure (.9995 fineness)

Qualifying bullion must also stay in the physical possession of an approved trustee, not a home safe or a safety deposit box you control.¹ The Tax Court applied this rule in McNulty v. Commissioner, treating over $400,000 in Eagles kept in a home safe as a taxable distribution because the arrangement gave the taxpayer “unfettered control.” Promoters advertising “home storage IRAs” through a checkbook LLC structure are selling that same violation.

Life Insurance Contracts

The tax code states plainly that no part of an IRA trust fund may be invested in life insurance contracts. Life insurance provides a death benefit for someone other than the account holder, which conflicts with the IRA’s purpose of accumulating retirement wealth for the owner. If an IRA does purchase a policy or an endowment contract with insurance features, the portion of the premium attributable to the insurance component is treated as a distribution to the account holder.² That triggers income tax and potentially the early withdrawal penalty.

Annuities are a different story. The code specifically contemplates “individual retirement annuities” as a permitted category because annuities function as retirement income vehicles, not death-benefit instruments.

S-Corporation Stock

An IRA cannot hold S-corporation stock because it doesn’t qualify as a permissible shareholder. Federal law limits S-corporation ownership to individuals, certain estates, and a narrow set of trust types.³ An IRA is a tax-exempt trust, not an individual, and it isn’t one of the exception categories, so it fails the test.

The consequences hit the company, not just your account. If an IRA acquires shares, the corporation risks losing its S election and reverting to C-corporation status, which brings double taxation at the corporate level and again on dividends.⁴ C-corporation stock, by contrast, is generally fine for an IRA to hold.

Loans and Pledged Assets

Unlike a 401(k), an IRA does not allow loans. If you borrow any money from your IRA, the account immediately stops being an IRA as of January 1 of that tax year, and you owe income tax on the entire balance.⁵ This isn’t a penalty on the amount borrowed. It blows up the whole account.

Pledging your IRA as collateral is handled differently but still badly. The portion you pledge as security is treated as distributed to you, triggering income tax (and the early withdrawal penalty if you’re under 59½) on that portion.² Pledge half your IRA to secure a business loan and half the account’s value becomes taxable income that year. The same rules apply to SEP-IRAs and SIMPLE IRAs.

Prohibited Transactions and Personal Use

This is where most people get tripped up. The prohibited-transaction rules don’t ban a specific asset; they ban how you use it and who you deal with. An IRA can own rental property, raw land, or commercial buildings. But the moment you or a family member personally benefits from that property, you’ve crossed the line.

Who Counts as a Disqualified Person

The law defines “disqualified persons” as the IRA owner, the owner’s spouse, ancestors (parents, grandparents), lineal descendants (children, grandchildren), the spouses of those descendants, and any fiduciary managing the account.⁶ Siblings, cousins, aunts, and uncles are not on that list. Any deal with a parent, child, or spouse, though, is off-limits.

What’s Actually Prohibited

Selling or leasing property between the account and a disqualified person, using IRA assets for a disqualified person’s benefit, and furnishing goods or services between the two are all prohibited.⁶ You can’t rent your IRA’s commercial building to your own company. You can’t let your daughter live in an IRA-owned condo. You can’t even paint the walls of an IRA-owned rental yourself, because that counts as furnishing services to the plan.

Every dollar tied to the investment has to move through the IRA itself. Paying repairs, property taxes, or insurance on an IRA-owned asset out of your personal funds is a prohibited contribution of value. You also can’t lend money to your IRA or put your personal credit behind its borrowings.

The Penalty

A prohibited transaction causes the entire IRA to lose its tax-exempt status as of January 1 of the year the violation occurred. The full fair market value of every asset in the account is treated as distributed to you on that date and taxed as ordinary income.⁷ If you’re under 59½, the 10% early withdrawal penalty applies to the entire amount. The disqualified person who participated in the transaction also owes an excise tax of 15% of the amount involved for each year the transaction remains uncorrected, jumping to 100% if it isn’t fixed by the end of the taxable period.⁶

The size of the violation doesn’t matter. If your $500,000 IRA owns a rental property and you spend a weekend staying there, the entire $500,000 becomes taxable income. One night in the guest room has the same effect as a full self-dealing scheme.

When Allowed Investments Still Generate Tax

An IRA is tax-exempt, but that exemption has a limit. Income from an active trade or business unrelated to the IRA’s tax-exempt purpose is subject to unrelated business income tax (UBIT) at trust rates.⁸ This rarely matters for stocks and bonds. It matters a lot for self-directed IRAs that own operating businesses or leveraged real estate. If gross unrelated business income reaches $1,000 in a year, the trustee must file Form 990-T and pay the tax.⁹ Trust brackets are compressed, hitting 37% at just $16,000 of taxable income.¹⁰

The most common UBIT trigger is leveraged real estate. When an IRA uses a non-recourse mortgage to buy property, the portion of income attributable to the borrowed money is taxable as unrelated debt-financed income. If the IRA puts 40% down and borrows 60%, roughly 60% of the rental income and any capital gain on sale are subject to UBIT. The cash-funded portion stays tax-deferred (or tax-free in a Roth). Even if deductions zero out the taxable amount, Form 990-T still needs to be filed. One notable exception: 401(k) plans are generally exempt from the debt-financed income rule, so the choice between a self-directed IRA and a solo 401(k) for leveraged real estate carries real tax consequences.

Fixing a Mistake

If a prohibited transaction has occurred, the disqualified person who participated must file Form 5330 to report and pay the excise tax.¹¹ The “taxable period” for the 15% initial excise tax runs from the date of the transaction until the earliest of three events: the IRS mails a notice of deficiency, the IRS assesses the tax, or the transaction is fully corrected.⁶ Correction means undoing the transaction to the extent possible and restoring the plan to the financial position it would have occupied had the violation never happened. Catching the error before the IRS does makes a meaningful difference in what you’ll owe.

1
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
2
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
3
Office of the Law Revision Counsel. 26 USC 1361 – S Corporation Defined
4
Internal Revenue Service. S Corporations
5
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
6
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
7
Internal Revenue Service. Retirement Topics – Prohibited Transactions
8
Office of the Law Revision Counsel. 26 USC 511 – Imposition of Tax on Unrelated Business Income
9
Internal Revenue Service. Instructions for Form 990-T (2025)
10
Internal Revenue Service. Revenue Procedure 2025-32
11
Internal Revenue Service. Instructions for Form 5330 (Rev. December 2025)